We used to have rate hikes. But that was a decade ago.
For 10 long years Australia has seen the Reserve Bank (RBA) move in one direction only. Rates reached a peak of 4.75% in November 2010, and stayed there for a year before the first cut in November 2011. We’ve been cutting now for nine years — and rates are not expected to rise for another three years at least.
Back in November 2010, the RBA was facing inflation of about 3% — rate hikes were arguably justified. Now, macroeconomists can’t find inflation anywhere. They would love for a bit of wage inflation and a bit of price inflation. But all around the world, it’s out of reach.
The tools of monetary policy are seemingly broken — and the example of Japan, where inflation went missing and a “lost decade” turned into a lost generation, seems increasingly relevant.
In the economic journals, academic macroeconomists are developing theories for why. It seems highly likely the way out of this slump in wages growth, inflation and official rates will not be the same way we got in. We won’t just achieve inflation by low interest rates — a whole new approach to monetary policy might be needed.
The RBA has pencilled in a major review of monetary policy for after the pandemic. Watch this space.
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